Saturday, May 18, 2013

Chairman Ben S. Bernanke is an optimist when it comes to our long-run
economic prospects (i.e. he does not endorse the notion that productivity is
slowing). I'm with him. (This is a graduation speech Bernanke gave at Bard College at Simon's
Rock, Great Barrington, Massachusetts):

Economic Prospects for the Long Run: Let me start by congratulating the
graduates and their parents. The word "graduate" comes from the Latin word
for "step." Graduation from college is only one step on a journey, but it is
an important one and well worth celebrating.

I think everyone here appreciates what a special privilege each of you has
enjoyed in attending a unique institution like Simon's Rock. It is, to my
knowledge, the only "early college" in the United States; many of you came
here after the 10th or 11th grade in search of a different educational
experience. And with only about 400 students on campus, I am sure each of
you has felt yourself to be part of a close-knit community. Most important,
though, you have completed a curriculum that emphasizes creativity and
independent critical thinking, habits of mind that I am sure will stay with
you.

What's so important about creativity and critical thinking? There are many
answers. I am an economist, so I will answer by talking first about our
economic future--or your economic future, I should say, because each of you
will have many years, I hope, to contribute to and benefit from an
increasingly sophisticated, complex, and globalized economy. My emphasis
today will be on prospects for the long run. In particular, I will be
looking beyond the very real challenges of economic recovery that we face
today--challenges that I have every confidence we will overcome--to speak,
for a change, about economic growth as measured in decades, not months or
quarters.

Many factors affect the development of the economy, notably among them a
nation's economic and political institutions, but over long periods probably
the most important factor is the pace of scientific and technological
progress. Between the days of the Roman Empire and when the Industrial
Revolution took hold in Europe, the standard of living of the average person
throughout most of the world changed little from generation to generation.
For centuries, many, if not most, people produced much of what they and
their families consumed and never traveled far from where they were born. By
the mid-1700s, however, growing scientific and technical knowledge was
beginning to find commercial uses. Since then, according to standard
accounts, the world has experienced at least three major waves of
technological innovation and its application. The first wave drove the
growth of the early industrial era, which lasted from the mid-1700s to the
mid-1800s. This period saw the invention of steam engines, cotton-spinning
machines, and railroads. These innovations, by introducing mechanization,
specialization, and mass production, fundamentally changed how and where
goods were produced and, in the process, greatly increased the productivity
of workers and reduced the cost of basic consumer goods. The second extended
wave of invention coincided with the modern industrial era, which lasted
from the mid-1800s well into the years after World War II. This era featured
multiple innovations that radically changed everyday life, such as indoor
plumbing, the harnessing of electricity for use in homes and factories, the
internal combustion engine, antibiotics, powered flight, telephones, radio,
television, and many more. The third era, whose roots go back at least to
the 1940s but which began to enter the popular consciousness in the 1970s
and 1980s, is defined by the information technology (IT) revolution, as well
as fields like biotechnology that improvements in computing helped make
possible. Of course, the IT revolution is still going on and shaping our
world today.

Now here's a question--in fact, a key question, I imagine, from your
perspective. What does the future hold for the working lives of today's
graduates? The economic implications of the first two waves of innovation,
from the steam engine to the Boeing 747, were enormous. These waves vastly
expanded the range of available products and the efficiency with which they
could be produced. Indeed, according to the best available data, output per
person in the United States increased by approximately 30 times between 1700
and 1970 or so, growth that has resulted in multiple transformations of our
economy and society.1 History suggests that economic prospects
during the coming decades depend on whether the most recent revolution, the
IT revolution, has economic effects of similar scale and scope as the
previous two. But will it?

I must report that not everyone thinks so. Indeed, some knowledgeable
observers have recently made the case that the IT revolution, as important
as it surely is, likely will not generate the transformative economic
effects that flowed from the earlier technological revolutions.2 As
a result, these observers argue, economic growth and change in coming
decades likely will be noticeably slower than the pace to which Americans
have become accustomed. Such an outcome would have important social and
political--as well as economic--consequences for our country and the world.

This provocative assessment of our economic future has attracted plenty of
attention among economists and others as well. Does it make sense? Here's
one way to think more concretely about the argument that the pessimists are
making: Fifty years ago, in 1963, I was a nine-year-old growing up in a
middle-class home in a small town in South Carolina. As a way of getting a
handle on the recent pace of economic change, it's interesting to ask how my
family's everyday life back then differed from that of a typical family
today. Well, if I think about it, I could quickly come up with the Internet,
cellphones, and microwave ovens as important conveniences that most of your
families have today that my family lacked 50 years ago. Health care has
improved some since I was young; indeed, life expectancy at birth in the
United States has risen from 70 years in 1963 to 78 years today, although
some of this improvement is probably due to better nutrition and generally
higher levels of income rather than advances in medicine alone.
Nevertheless, though my memory may be selective, it doesn't seem to me that
the differences in daily life between then and now are all that large.
Heating, air conditioning, cooking, and sanitation in my childhood were not
all that different from today. We had a dishwasher, a washing machine, and a
dryer. My family owned a comfortable car with air conditioning and a radio,
and the experience of commercial flight was much like today but without the
long security lines. For entertainment, we did not have the Internet or
video games, as I mentioned, but we had plenty of books, radio, musical
recordings, and a color TV (although, I must acknowledge, the colors were
garish and there were many fewer channels to choose from).

The comparison of the world of 1963 with that of today suggests quite
substantial but perhaps not transformative economic change since then. But
now let's run this thought experiment back another 50 years, to 1913 (the
year the Federal Reserve was created by the Congress, by the way), and
compare how my grandparents and your great-grandparents lived with how my
family lived in 1963. Life in 1913 was simply much harder for most Americans
than it would be later in the century. Many people worked long hours at
dangerous, dirty, and exhausting jobs--up to 60 hours per week in
manufacturing, for example, and even more in agriculture. Housework involved
a great deal of drudgery; refrigerators, freezers, vacuum cleaners, electric
stoves, and washing machines were not in general use, which should not be
terribly surprising since most urban households, and virtually all rural
households, were not yet wired for electricity. In the entertainment sphere,
Americans did not yet have access to commercial radio broadcasts and movies
would be silent for another decade and a half. Some people had telephones,
but no long-distance service was available. In transportation, in 1913 Henry
Ford was just beginning the mass production of the Model T automobile,
railroads were powered by steam, and regular commercial air travel was quite
a few years away. Importantly, life expectancy at birth in 1913 was only 53
years, reflecting not only the state of medical science at the
time--infection-fighting antibiotics and vaccines for many deadly diseases
would not be developed for several more decades--but also deficiencies in
sanitation and nutrition. This was quite a different world than the one in
which I grew up in 1963 or in which we live today.

The purpose of these comparisons is to make concrete the argument made by
some economists, that the economic and technological transformation of the
past 50 years, while significant, does not match the changes of the 50
years--or, for that matter, the 100 years--before that. Extrapolating to the
future, the conclusion some have drawn is that the sustainable pace of
economic growth and change and the associated improvement in living
standards will likely slow further, as our most recent technological
revolution, in computers and IT, will not transform our lives as
dramatically as previous revolutions have.

Well, that's sort of depressing. Is it true, then, as baseball player Yogi
Berra said, that the future ain't what it used to be? Nobody really knows;
as Berra also astutely observed, it's tough to make predictions, especially
about the future. But there are some good arguments on the other side of
this debate.

First, innovation, almost by definition, involves ideas that no one has yet
had, which means that forecasts of future technological change can be, and
often are, wildly wrong. A safe prediction, I think, is that human
innovation and creativity will continue; it is part of our very nature.
Another prediction, just as safe, is that people will nevertheless continue
to forecast the end of innovation. The famous British economist John Maynard
Keynes observed as much in the midst of the Great Depression more than 80
years ago. He wrote then, "We are suffering just now from a bad attack of
economic pessimism. It is common to hear people say that the epoch of
enormous economic progress which characterised the 19th century is over;
that the rapid improvement in the standard of life is now going to slow
down."3 Sound familiar? By the way, Keynes argued at that time
that such a view was shortsighted and, in characterizing what he called "the
economic possibilities for our grandchildren," he predicted that income per
person, adjusted for inflation, could rise as much as four to eight times by
2030. His guess looks pretty good; income per person in the United States
today is roughly six times what it was in 1930.

Second, not only are scientific and technical innovation themselves
inherently hard to predict, so are the long-run practical consequences of
innovation for our economy and our daily lives. Indeed, some would say that
we are still in the early days of the IT revolution; after all, computing
speeds and memory have increased many times over in the 30-plus years since
the first personal computers came on the market, and fields like
biotechnology are also advancing rapidly. Moreover, even as the basic
technologies improve, the commercial applications of these technologies have
arguably thus far only scratched the surface. Consider, for example, the
potential for IT and biotechnology to improve health care, one of the
largest and most important sectors of our economy. A strong case can be made
that the modernization of health-care IT systems would lead to
better-coordinated, more effective, and less costly patient care than we
have today, including greater responsiveness of medical practice to the
latest research findings.4 Robots, lasers, and other advanced
technologies are improving surgical outcomes, and artificial intelligence
systems are being used to improve diagnoses and chart courses of treatment.
Perhaps even more revolutionary is the trend toward so-called personalized
medicine, which would tailor medical treatments for each patient based on
information drawn from that individual's genetic code. Taken together, such
advances could lead to another jump in life expectancy and improved health
at older ages.

Other promising areas for the application of new technologies include the
development of cleaner energy--for example, the harnessing of wind, wave,
and solar power and the development of electric and hybrid vehicles--as well
as potential further advances in communications and robotics. I'm sure that
I can't imagine all of the possibilities, but historians of science have
commented on our collective tendency to overestimate the short-term effects
of new technologies while underestimating their longer-term potential.5

Finally, pessimists may be paying too little attention to the strength of
the underlying economic and social forces that generate innovation in the
modern world. Invention was once the province of the isolated scientist or
tinkerer. The transmission of new ideas and the adaptation of the best new
insights to commercial uses were slow and erratic. But all of that is
changing radically. We live on a planet that is becoming richer and more
populous, and in which not only the most advanced economies but also large
emerging market nations like China and India increasingly see their economic
futures as tied to technological innovation. In that context, the number of
trained scientists and engineers is increasing rapidly, as are the resources
for research being provided by universities, governments, and the private
sector. Moreover, because of the Internet and other advances in
communications, collaboration and the exchange of ideas take place at high
speed and with little regard for geographic distance. For example, research
papers are now disseminated and critiqued almost instantaneously rather than
after publication in a journal several years after they are written. And,
importantly, as trade and globalization increase the size of the potential
market for new products, the possible economic rewards for being first with
an innovative product or process are growing rapidly.6 In short,
both humanity's capacity to innovate and the incentives to innovate are
greater today than at any other time in history.

Well, what does all this have to do with creativity and critical thinking,
which is where I started? The history of technological innovation and
economic development teaches us that change is the only constant. During
your working lives, you will have to reinvent yourselves many times. Success
and satisfaction will not come from mastering a fixed body of knowledge but
from constant adaptation and creativity in a rapidly changing world.
Engaging with and applying new technologies will be a crucial part of that
adaptation. Your work here at Simon's Rock, and the intellectual skills,
creativity, and imagination that that work has fostered, are the best
possible preparation for these challenges. And while I have emphasized
technological and scientific advances today, it is important to remember
that the arts and humanities facilitate new and creative thinking as well,
while helping us to draw meaning that goes beyond the purely material
aspects of our lives. I wish you the best in facing the difficult but
exciting challenges that lie ahead. Congratulations.

5. This tendency has been referred to as the first law of technology. On the
potential impact of genome sequencing, see Francis Collins (2010), "Has the
Revolution Arrived?"Nature, vol. 464 (April), pp.674-75. For an accessible
discussion of the possibilities for life expectancy, see Stephen S. Hall
(2013), "On beyond 100," National Geographic, May,
http://ngm.nationalgeographic.com/2013/05/longevity/hall-text.

6. For a discussion of the economic models of growth that build in
cumulative forces of knowledge generation and the effects of expansion in
the size of the market, see Charles I. Jones and Paul M. Romer (2010), "The
New Kaldor Facts: Ideas, Institutions, Population, and Human Capital," American
Economic Journal: Macroeconomics, vol. 2 (January), pp. 224-45.

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Bernanke: Economic Prospects for the Long Run

Chairman Ben S. Bernanke is an optimist when it comes to our long-run
economic prospects (i.e. he does not endorse the notion that productivity is
slowing). I'm with him. (This is a graduation speech Bernanke gave at Bard College at Simon's
Rock, Great Barrington, Massachusetts):

Economic Prospects for the Long Run: Let me start by congratulating the
graduates and their parents. The word "graduate" comes from the Latin word
for "step." Graduation from college is only one step on a journey, but it is
an important one and well worth celebrating.

I think everyone here appreciates what a special privilege each of you has
enjoyed in attending a unique institution like Simon's Rock. It is, to my
knowledge, the only "early college" in the United States; many of you came
here after the 10th or 11th grade in search of a different educational
experience. And with only about 400 students on campus, I am sure each of
you has felt yourself to be part of a close-knit community. Most important,
though, you have completed a curriculum that emphasizes creativity and
independent critical thinking, habits of mind that I am sure will stay with
you.

What's so important about creativity and critical thinking? There are many
answers. I am an economist, so I will answer by talking first about our
economic future--or your economic future, I should say, because each of you
will have many years, I hope, to contribute to and benefit from an
increasingly sophisticated, complex, and globalized economy. My emphasis
today will be on prospects for the long run. In particular, I will be
looking beyond the very real challenges of economic recovery that we face
today--challenges that I have every confidence we will overcome--to speak,
for a change, about economic growth as measured in decades, not months or
quarters.

Many factors affect the development of the economy, notably among them a
nation's economic and political institutions, but over long periods probably
the most important factor is the pace of scientific and technological
progress. Between the days of the Roman Empire and when the Industrial
Revolution took hold in Europe, the standard of living of the average person
throughout most of the world changed little from generation to generation.
For centuries, many, if not most, people produced much of what they and
their families consumed and never traveled far from where they were born. By
the mid-1700s, however, growing scientific and technical knowledge was
beginning to find commercial uses. Since then, according to standard
accounts, the world has experienced at least three major waves of
technological innovation and its application. The first wave drove the
growth of the early industrial era, which lasted from the mid-1700s to the
mid-1800s. This period saw the invention of steam engines, cotton-spinning
machines, and railroads. These innovations, by introducing mechanization,
specialization, and mass production, fundamentally changed how and where
goods were produced and, in the process, greatly increased the productivity
of workers and reduced the cost of basic consumer goods. The second extended
wave of invention coincided with the modern industrial era, which lasted
from the mid-1800s well into the years after World War II. This era featured
multiple innovations that radically changed everyday life, such as indoor
plumbing, the harnessing of electricity for use in homes and factories, the
internal combustion engine, antibiotics, powered flight, telephones, radio,
television, and many more. The third era, whose roots go back at least to
the 1940s but which began to enter the popular consciousness in the 1970s
and 1980s, is defined by the information technology (IT) revolution, as well
as fields like biotechnology that improvements in computing helped make
possible. Of course, the IT revolution is still going on and shaping our
world today.

Now here's a question--in fact, a key question, I imagine, from your
perspective. What does the future hold for the working lives of today's
graduates? The economic implications of the first two waves of innovation,
from the steam engine to the Boeing 747, were enormous. These waves vastly
expanded the range of available products and the efficiency with which they
could be produced. Indeed, according to the best available data, output per
person in the United States increased by approximately 30 times between 1700
and 1970 or so, growth that has resulted in multiple transformations of our
economy and society.1 History suggests that economic prospects
during the coming decades depend on whether the most recent revolution, the
IT revolution, has economic effects of similar scale and scope as the
previous two. But will it?